Raghuram Rajan on India’s ‘Fault Lines’

Economist Raghuram Rajan says that significant parts of the population are not benefiting from growth.

Chicago Booth economist Raghuram Rajan said he wanted to get past the “greedy bankers” and “lazy regulators” explanations for the economic crisis that slammed the U.S. in 2008. What he came up with: Income stagnation for the U.S. middle class.

Mr. Rajan, in his new book “Fault Lines: How Hidden Fractures Still Threaten the World Economy,” says American politicians on both sides of the aisle looked the other way as cheap housing credit flowed to people in the middle class, letting them own homes and consume at a level that their earnings wouldn’t have allowed (read the WSJ’s David Kessel on the book here).

“From the household perspective it means you’ve got consumption going up, wealth going up and you don’t focus on your stagnant income,” he said, calling it a “populist” solution to growing income inequality in the U.S. that both Democrats and Republicans could live with.

More difficult solutions would have involved figuring out how to increase jobs and real wages for workers with only high school degrees or how to increase education levels and skills to allow more Americans to qualify for higher-paying jobs.

When he was in New Delhi Thursday evening for the official release of the Indian edition of the book, which has an extra chapter on India, Mr. Rajan drew parallels between the two nations.

“There is a fundamental problem in India, which is that significant parts of the population are not benefiting from the growth process,” said Mr. Rajan. “This is very similar to what happened in the U.S.”

The University of Chicago economist, who is credited with being one of the few people to point out looming problems with the previous economic boom while others were still celebrating it, said that in India most people in rural areas still do not have access to transportation to places where there are jobs. They also lack the health insurance and savings they need to deal with emergencies.

“There’s a lot of room to go in trying to bring this population into the growth process,” he said.

He didn’t spell it out, but his remark sounded like a subtle warning to India to be careful about how it addresses its masses of have-nots – an admonition to carry out the difficult long-term investments in its people rather than to offer short-term fixes. He also reiterated concerns he’s raised in the past about India’s rich.

Mr. Rajan has the ear of the right people. Montek Singh Ahluwalia, deputy chair of the Planning Commission, which sets goals and earmarks funds for different parts of the Indian economy for five-year periods, was there and accepted the first copy of the Indian edition, which has a curiously garish cover compared to the demure tones of the American edition.

“I agree there’s a lack of inclusion – too many people are too poor – but there there’s no doubt a huge middle is opening up,” said Mr. Ahluwalia. “In the bottom 30 or 40% not as much is happening as it should.”

The book also came with the sort recommendation you won’t find at the book presentations of very many economists, with Mr. Rajan’s children coming up to the podium part way through the proceedings.